Investing has historically been seen as a practice too complex or expensive for the average person, but robo-advisors have forever changed the industry. A robo-advisor is a digital platform that automates investment decisions based on a user’s financial information, balancing their risk tolerance with external factors to build and manage a portfolio.
Top Robo-Advisors to Know
- Wealthfront
- Betterment
- Vanguard
- Charles Schwab
- Robinhood
Betterment and Wealthfront introduced the concept of automated investing in the early 2010s, inspiring both financial powerhouses and newcomers alike to follow in their footsteps. Whether investors want a fully autonomous robo-advisor or one that’s guided by human input, we’re taking a closer look at some of the most popular tools to date that continue to make investing more accessible and affordable.
What Are Robo-Advisors?
A robo-advisor is software that automates the decisions involved in creating and maintaining an investment portfolio. While some companies may supplement robo-advisors with human expertise in a hybrid environment, many operate with little to no supervision. They essentially take on the role of a financial advisor, making decisions on when to buy and sell funds that align with an investor’s preferences.
Compared to traditional financial services, robo-advisors typically offer lower fees, smaller minimum requirements and a faster process for assembling diverse portfolios. Investing is then accessible even to those with limited financial knowledge or personal wealth, expanding the pool of participants in the stock market.
How Do Robo-Advisors Work?
Robo-advisors deliver a personalized investing experience through the following steps:
- Personal Information: Users first answer questions about their risk tolerance, personal goals and other financial information.
- Portfolio Building: The robo-advisor uses algorithms — sets of instructions for solving problems — to select stocks, bonds and other asset classes based on an investor’s preferences, creating a customized portfolio.
- Long-Term Management: The robo-advisor then monitors the portfolio and automatically buys and sells assets to maintain balance as needed.
The algorithms behind robo-advisors are steered by baked-in principles, namely the modern portfolio theory. Developed by Harry Markowitz in the 1950s, this framework emphasizes that each investment contributes to the risk and return of an entire stock portfolio, promoting an approach that spreads investments across different asset classes to minimize the portfolio’s overall risk. As a result, robo-advisors typically invest in exchange-traded funds (ETFs) and other low-risk investment vehicles.
Another concept often embedded in these algorithms is tax-loss harvesting, which involves selling investments at a loss to offset gains from other investments. Investors use this method to reduce their taxes, and it’s become a common feature that robo-advisors offer to win over those interested in maximizing their returns.
Top Robo-Advisors to Know
While Wealthfront and Betterment remain popular, investors can now choose from dozens of robo-advisors. Here are some of the top options available today.
Wealthfront lets users get started by depositing just $500, which is invested in funds covering clean energy, social responsibility and cryptocurrency, among other categories. The platform warns investors when their choices disregard their risk tolerance and automatically executes successive investments to balance a portfolio. Throughout this process, users can easily track all activity in the mobile app.
Betterment tailors portfolios to an investor’s financial goals, whether that’s simply to accumulate more wealth or to save up for retirement. After distributing funds across global asset classes and markets, all trades related to tax reductions, reinvestments and portfolio rebalancing are automated. That said, Betterment’s in-house investing team assesses each portfolio and takes action as needed to keep investors on track to achieve their milestones.
Vanguard’s digital advisor develops detailed profiles of investors through a risk assessment and individual goal-setting. It then helps users choose the ideal funds for them, whether it’s cheaper Vanguard ETFs, higher-reward index funds or environmental, social and governance (ESG) funds. Along the way, users can receive updates on their financial outlook and access tools to calculate debt, track their progress and more.
Charles Schwab’s Intelligent Portfolios service supports a variety of investors with 50 ETFs across 20 asset classes, six risk profiles ranging from conservative to aggressive and three investment strategies focused on income, U.S. funds or global funds. While at least $5,000 is required to get started, there are no advisory fees or commissions, and users can call Schwab’s U.S.-based support team with any questions 24/7.
Robinhood Strategies combines automation with the company’s team of professional advisors, who assemble diverse portfolios that mix stocks and ETFs and monitor these accounts. At the same time, users can stay in the know by following real-time market insights and toggling stocks on or off to rebalance their portfolios. Experienced investors can also use Monte Carlo simulations to project their earnings and adjust accordingly.
SoFi’s robo-advisor manages as little as $50, referencing each investor’s personal risk assessment to build portfolios that prioritize low-cost funds, sprinkle in alternative assets or champion social responsibility. For those who want a human touch, BlackRock and SoFi experts can provide portfolio recommendations, and users can schedule a complimentary 30-minute meeting with a financial planner as well.
Acorns automatically executes recurring investments, rebalances portfolios and reinvests dividends from funds. To ensure no cent is wasted, users can set up a “round-up” feature that automatically invests leftover change from purchases. Acorns has taken automation even further with its Money Manager feature, which oversees how funds are distributed across investing, saving and spending categories according to a user’s preferences.
Ally Financial’s robo-advisor gives investors a slate of ETFs to choose from, either setting aside 30 percent of a portfolio in cash or investing almost all of it, depending on each user’s risk tolerance. Investors can also guide the robo-advisor based on their preferences to minimize taxes, focus on ESG funds or generate income. From there, the advisor can manage the accounts, and portfolio specialists are available for additional assistance.
M1 Finance lets investors automate portfolio management with various accounts, including brokerage, retirement and crypto offerings. Once investors select their funds and set their targets, M1 displays each portfolio as a pie, making it easy to visualize holdings and identify categories that need more funding. The platform then rebalances the portfolio, completing trades during scheduled windows to avoid erratic decision-making.
ETrade Core Portfolios considers an investor’s risk tolerance and financial goals to determine a long-term portfolio strategy. Experts still pick funds that align with a user’s selections, but ETrade’s robo-advisor takes over monitoring and managing the portfolio, including executing tax-loss harvesting when appropriate. Users can track their progress via a mobile app and monthly reports and reach out to ETrade’s team with additional questions.
Merrill Lynch implements a hybrid approach that supplements robo-advisors with human experience, as reflected in its Guided Investing program. After users work with the company’s robo-advisor to develop a plan based on their risk tolerance, goals and timeline, a team of professionals chooses the funds and actively manages the portfolio. Investors can always check in on their accounts through Merrill Lynch’s online dashboard.
SigFig learns about users’ goals when they complete a questionnaire and customizes portfolios accordingly, allowing them to store their money with either Charles Schwab or Fidelity. The robo-advisor handles all trading from there on out, reallocating cash, interest or dividends to ensure users can still meet their personal targets. It also employs methods to reduce fees and commissions, enabling investors to maximize their returns.
Frequently Asked Questions
What is a robo-advisor?
A robo-advisor is software that uses algorithms to pick stocks, bonds and other asset classes aligned with an investor’s risk tolerance and preferences. These algorithms are often equipped with principles that lead robo-advisors to prioritize a diverse portfolio that minimizes risks, fees and taxes. As a result, robo-advisors can autonomously manage entire portfolios, executing trades as needed to balance funds and help investors meet their goals.
How do robo-advisors make money?
Robo-advisors typically charge annual advisory fees calculated as a percentage of the assets under management (AUM). Some services may also implement monthly fees or receive kickbacks from the operational fees of the ETFs they work with.
What is the difference between a robo-advisor and a human financial advisor?
Both help people manage their investments, but they differ in how they offer advice. Robo-advisors use algorithms to build and manage portfolios based on a user’s goals, risk tolerance and other general information — typically at a lower cost and with lower account minimums. Human advisors, meanwhile, can tailor their recommendations to a user’s specific financial circumstances, offering more hands-on guidance on topics like taxes, retirement and estate planning. As a result, robo-advisors may be the best option for investors with relatively straightforward needs, whereas human advisors can provide more customized support for unique situations.
